How planning ahead can help a business survive and thrive

Glyn Mummery, specialist business adviser and insolvency expert in our Brentwood office, outlines the importance of planning ahead to ensure a business thrives, and survives.

Business owners need to be forward thinking to thrive and succeed. As a specialist business adviser, myself and the team have seen several firms fall short of financial targets and into distress, because of failing to plan and manage budgets effectively. There are so many factors that can impact cashflow, so forecasting and good money management are essential.

The summer period is a prime example of a time of year that might alter your working capital requirements. For example, many local firms in the retail and leisure sector will have certainly felt the pinch this summer if they didn’t plan ahead and forecast for World Cup fever and the bout of wonderful weather. While it helped bring in cash, those who failed to pre-order stock and increase the quantity of orders in anticipation, may have found themselves losing out because they couldn’t keep up with demand.

On the other hand, it is also about having a plan in place for those quieter months when visitor levels drop. Adjusting stock levels and opening hours will help to keep costs in line with sales.

Managing your money is key

If you are a seasonal business, naturally geared to selling more at different periods in the year, think about how you can bring sales in all year round. Diversifying and adapting your business model to keep income steady throughout the year is the best way to manage cashflow, and then later taking advantage of any seasonal peaks on top of this more consistence performance. If you operate in sectors like retail, leisure or hospitality, making sure you’re prepared and making the most of calendar highlights throughout the year, such as high-profile events like Royal Ascot, Wimbledon or premier league football matches, will ensure you’re capitalising on the peaks and providing yourself with a cushion in the slower trough periods. Businesses could look at Partnering with local festivals, shows or events and create a themed activity to leverage consumer buzz around these moments.

There are also the inevitable market fluctuations – things that are generally out of management teams’ control. The uncertainty around Brexit or a rise in interest rates, can have a knock-on effect to consumer spending, for example. Some of these macro-factors can be anticipated and prepared for, but there should also be enough flexibility in a firm’s finances to adapt when these things do happen.

It’s also important to guard against over-trading. Small businesses can often get ‘contract-happy’ in the early days. Saying yes to too much work without the resource to complete it can be the downfall of so many firms. Negotiating payments terms with buyers and suppliers is the first and foremost thing to address here, as well as being careful not to run before the business has a handle on walking.

This is especially crucial for small firms, as they are often the most susceptible to failing as a result of poor cashflow management. Without the fall-back of a large balance sheet or access to large scale funding injections from banks, investors or shareholders, SMEs can be particularly vulnerable.

Help is on hand to help manage cashflow

There are measures firms can take in advance to mitigate these challenges. Pre-empting and mapping out pressure points when a business may be unable to fulfil a contract or any delay in payments is a good starting point for alleviating pinched cash flows.

Changes in cash flow can put strains on firms of all sizes, but particularly SMEs. If too much working capital is tied up in the day-to-day costs of the business, it’s difficult for firms to respond to new opportunities or challenges. For example, if a company agrees to 90-day payment terms with its customers, it will obviously put a greater strain on cash flow than 30-day terms, as money for a product or service is taking longer to be deposited into the bank account.

Many banks now also have a cashflow calculator online service that firms can tap into for free. This can give management teams a better understanding of how to manage capital during a trading cycle, providing a clear view of payment timelines.

Sometimes firms need more support to manage this beyond the realms of what they already have in the bank. Management teams should be open and transparent with business advisers and bank managers, so if there is cause for concern, funding options can be put in place to sustain cash flow, ensuring supplier payments and wages are met.

Top tips on planning for next year

Reviewing and applying learnings to future plans truly is the key to keeping a business afloat now.

Ensuring you have a robust plan in place based on year-on-year trends will help to put a business in the best possible position to navigate challenges and take advantage of opportunities that crop up each year. Our top tips for annual planning are:

1. Budget cash flow forecasts: Analyse what you planned for this year. Measure forecasts against actuals achieved throughout the summer and duration of 2018. Knowing where too much capital may have been invested or where not enough was put in place to support a particular project or periods of downfall, for example, will help a business make suitable allowances for the following year.
2. Planning cash receipts: Do you have a process in place in the instance that payments are overdue, either to suppliers or from clients? If not, consider implementing funding management facilities, such as invoice finance, that can stand in for periods where either party has not been paid.
3. Managing staff levels: Take note of how many colleagues are realistically required to fulfil a role and demand from customers. For firms operating in the tourist sector, this may mean increasing hires during summer as the staycation trend grows. For construction and engineering firms, it may also mean taking on more skilled workers to work on the increased infrastructure projects that can take place during the summer months.
4. Dialling up and winding down: It is important to accept that peaks and troughs in business levels are inevitable. Cyclical fluctuations can be challenging for firms. Reviewing sales figures and customer demand flows will inform a deeper understanding of when highs and lows are likely to occur, helping to mitigate quiet periods and any potential losses.
5. Expand the business offering: If funding allows, identify where you can diversify your business’ product or service offering to appeal to a different customer base.

First published in the Essex Chronicle in September 2018.